In the Shadow of the United States: The International Transmission Effect of Asset Returns

Chang, Kuang Liang and Chen, Nan Kuang and Leung, Charles Ka Yui (2011): In the Shadow of the United States: The International Transmission Effect of Asset Returns.

Abstract

We examine how the fluctuations in financial and housing markets in U.S. affect the asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best predictor.

• Item Type: MPRA Paper
• Language: English
• Keywords: currency board, fixed nominal exchange rate, international transmission mechanism, hierarchical Markov regime-switching model, vector autoregressive model
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; G - Financial Economics > G1 - General Financial Markets > G10 - General

References

Bai, J. and P. Wang, 2011, Restricted Markov Switching Model and Its Application in Economic Time Series Analysis, forthcoming in Journal of Applied Econometrics.

Benigno, P., 2002. A Simple Approach to International Monetary Policy Coordination. Journal of International Economics, 57, 177-196.

Benigno, G., Benigno, P., 2006. Designing Targeting Rules for International Monetary Policy Cooperation. Journal of Monetary Economics, 53, 473--506.

Bernanke, B., 2007, Globalization and Monetary Policy, available at http://www.federalreserve.gov/newsevents/speech/Bernanke20070302a.htm.

Brunnermeier, M. K., Pedersen, L,H., 2009. Market Liquidity and Funding Liquidity. Review of Financial Studies 22(6), 2201-2238.

Canzoneri, M. B., Cumby, R. E., Diba, B. T., 2005. The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come. Journal of International Economics, 66, 363-- 384.

Chang, K. L.; N. K. Chen and C. K. Y. Leung, 2010, Would some model please give me some hints? In search of some stylized facts of the Monetary Policy and Asset Return Dynamics, National Taiwan University, mimeo.

Chang, K. L.; N. K. Chen and C. K. Y. Leung, 2011a, Monetary Policy, Term Structure and Real Estate Return: Comparing REIT, housing and stock, Journal of Real Estate Finance and Economics, 43, 221-257.

Chang, K. L.; N. K. Chen and C. K. Y. Leung, 2011b, The Dynamics of Housing Returns in Singapore: How Important are the International Transmission Mechanisms?, forthcoming in Regional Science and Urban Economics.

Chen, N. K. and C. K. Y. Leung, 2008, Asset price spillover, collateral and crises: with an application to property market policy, Journal of Real Estate Finance and Economics, 37, 351-385.

Chong, T. T. L., T. H. Lam and I. K. M. Yan, 2011, Is the Chinese Stock Market Really Inefficient, City University of Hong Kong, mimeo.

Chong, T. T. L., and I. K. M. Yan, 2011, Threshold Models with Multiple Threshold Variables and the Prediction of Financial Crises, City University of Hong Kong, mimeo.

Chou, W. L. and K. Y. Wong, 2001, Economic growth and international trade: the case of Hong Kong, Pacific Economic Review, 6, 313-329.

Corsetti, G., Pesenti, P., 2001. Welfare and Macroeconomic Interdependence. Quarterly Journal of Economics, 116, 421--45.

Corsetti, G., Pesenti, P., 2005. International Dimensions of Optimal Monetary Policy. Journal of Monetary Economics, 52(2), 281-305.

Corsetti, G., Pesenti, P., Roubini, N., 1999. What Cause the Asian currency and financial crisis? Japan and the World Economy 11, 305-73.

Cosslett, S. and L. F. Lee, 1985, Serial correlation in latent discrete variable models, Journal of Econometrics, 27, 79-97.

Davis, S., 2010, The Adverse Feedback Loop and the Real Effects of Financial Sector Uncertainty, Vanderbilt University, mimeo.

Demyanyk, Y.S., Van Hemert, O., 2009. Understanding the Subprime Mortgage Crisis. Forthcoming in Review of Financial Studies.

Diebold, F. and R. Mariano, 1995, Comparing predictive accuracy, Journal of Business & Economic Statistics, 13, 253-263.

Engle, R., 2009, Anticipating correlations: a new paradigm for risk management, Princeton: Princeton University Press. Estrella, A., 2005, Why does the yield curve predict output and inflation?, Economic Journal 115, 722-44.

Estrella, A. and G. Hardouvelis, 1991, The term structure as a predictor of real economic activity, Journal of Finance 46, 555-76.

Estrella, A. and F. Mishkin, 1997, The predictive power of the term structure of interest rates in Europe and the United States: implications for the European Central Bank, European Economic Review 41, 1375-1401.

Estrella, A. and M. R. Trubin, 2006, The yield curve as a leading indicator: some practical issues, Current Issues in Economics and Finance 12, Federal Reserve Bank of New York.

Filardo, A., 1994, Business-Cycle Phases and Their Transitional Dynamics, Journal of Business & Economic Statistics, 12, 299-308.

Garcia, R. and H. Schaller, 2002, Are the effects of monetary policy asymmetric, Economic Inquiry, 40, 102-119.

Gertler, M. and N. Kiyotaki, 2010, Financial intermediation and credit policy in business cycle analysis, forthcoming in Handbook of Monetary Economics, vol. 3, edited by M. Woodford, New York: Elsevier.

Gorton, G.B., 2007. The Panic of 2007. Working paper.

Hamilton, J., 1994, Time series analysis, Princeton: Princeton University Press.

He, D., Z. Zhang and H. Wang, 2009, Hong Kong's financial market interactions with the US and Mainland China in crisis and tranquil times, Hong Kong Monetary Authority, mimeo.

Ho, L. S. and G. Wong, 2008, Nexus between housing and the macroeconomy: the Hong Kong case, Pacific Economic Review, 13, 223-239.

Kaminsky, G.L., Reinhart, C.M., 2000. On Crises, Contagion, and Confusion. Journal of International Economics 51, 145-168.

Leung, C. K. Y., 2007, Equilibrium correlations of asset price and return," Journal of Real Estate Finance and Economics 34, 233-256.

Leung, C. K. Y., P. W. Y. Cheung and E. C. H. Tang, 2011, Financial Crisis and the Co-movements of Housing Sub-markets: Do relationships change after a crisis?, forthcoming in International Real Estate Review.

Leung, C. K. Y. and E. C. H. Tang, 2011, Comparing two financial crises: the case of Hong Kong Real Estate Markets, forthcoming in "Global Housing Markets: Crises, Institutions and Policies," eds. by Ashok Bardhan, Robert Edelstein and Cynthia Kroll, John Wiley & Sons.

Leung, C. K. Y. and W. L. Teo, 2009, The Wall Street concerns might be right: equilibrium correlations of asset price do change with monetary policy, paper presented at the Asian Real Estate Society meeting.

Leung, T. C. and K. P. Tsang, 2011a, Anchoring and Loss Aversion in the Housing Market: Implications on Price Dynamics, Chinese University of Hong Kong, mimeo.

Leung, T. C. and K. P. Tsang, 2011b, Can Anchoring and Loss Aversion Explain the Predictability in the Housing Market? forthcoming in the Pacific Economic Review.

Lubik, T., and F. Schorfheide, 2003, Computing sunspot equilibria in linear rational expectations models, Journal of Economic Dynamics & Control 28, 273--285.

Lubik, T., and F. Schorfheide, 2005, A Bayesian Look at New Open Economy Macroeconomics, NBER Macroeconomics Annual, 313-366.

Maheu, J. and T. McCurdy, 2000, Identifying bull and bear markets in stock returns. Journal of Business and Economic Statistics, 18, 100--112.

Obstfeld, M., Rogoff, K., 2002. Global Implications of Self-Oriented National Monetary Policy Rules. Quarterly Journal of Economics, 117, 503--535.

Peek, J., Rosengren, E.S., 2000. Collateral Damage: Effects of the Japanese Bank Crisis on Real Activity in the United States. American Economic Review 90, 30-45.

Plosser, C. and K. G. Rouwenhorst, 1994, International term structures and real economic growth, Journal of Monetary Economics 33, 133-155.

Radelet, S., Sachs, J., 1998. The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. Brookings Papers on Economic Activity, 1-74.

Sims, C., 1980, Macroeconomics and reality, Econometrica, 48, 1-48.

Stock, J., and M. Watson, 1989, New Indexes of Coincident and Leading Indicators, In NBER Macroeconomic Annual 4, ed. Olivier Blanchard and Stanley Fischer, 351-394.

Stock, J. and M. Watson, 2002, Forecasting Using Principal Components From a Large Number of Predictors, Journal of American Statistical Association, 97(260), 1167-1179.

Taylor, J., 2009. The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. Working paper.

U.S. Congress (Joint Economic Committee), 2000, International dimensions to U.S. monetary policy, available at http://www.house.gov/jec/fed/intern.pdf.